BNP Paribas

London, 09 December 2011 — Moody’s Investors Service has today downgraded the standalone bank financial strength rating (BFSR) of BNP Paribas (BNPP) by two notches to C from B- (now mapping to A3 on the long-term scale from A1 previously) and the long-term debt and deposit ratings by one notch to Aa3. The one-notch downgrade of the long-term debt and deposit ratings to Aa3 follows the downgrade of the BFSR. The long-term ratings now incorporate three notches of systemic support (previously two notches), derived from the rating agency’s view that the probability of systemic support for BNPP remains very high.

These rating actions conclude the review initiated on 15 June 2011 and extended on 14 September 2011. The lower BFSR reflects our view that BNPP’s liquidity and funding constraints are now offsetting its previous, prevailing credit-positive factors (such as high diversification, strong franchise, stable earnings). The outlooks on the BFSR and long-term ratings are negative. The Prime-1 short-term rating was affirmed. Dated subordinated debt securities were also downgraded by one notch to A1 and remain on review for downgrade pending our reassessment of systemic support for such debt.

As stated in our recent report "Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns", since the initiation of our review in June 2011, the severity of the euro-area crisis has increased. As one of the largest banks in the euro area, the creditworthiness of BNPP is necessarily affected by the fragile operating environment for European banks.

During our review of BNPP’s ratings, we have concluded that:

(1) Liquidity and funding conditions have deteriorated significantly for BNPP, which has historically made significant use of wholesale funding markets. The probability that the bank will face further funding pressures has risen in line with the worsening European debt crisis.

(2) BNPP’s deleveraging plan will likely help somewhat reduce its need for wholesale funding. However, given that many other banks in Europe are engaged in similar programmes, there is a mounting risk that the resulting asset sales could be detrimental for capital.

(3) BNPP retains significant, albeit reduced, exposures to sovereigns and their economies that are themselves experiencing tighter refinancing conditions and declining creditworthiness, notably Italy, which in turn expose the bank to heightened credit and liquidity risks.

These considerations have resulted in a lowering of the BFSR to C from B-. In addition, we believe that:

— The likelihood that BNPP would benefit from government support if needed remains very high, and hence leads to a one-notch reduction in the senior debt and deposit ratings, despite the two-notch downgrade of the BFSR; and

— Conditions in the euro-area sovereign debt and banking markets — as well as macroeconomic conditions overall — lead us to assign a negative outlook to BNPP’s standalone and long-term debt and deposit ratings.

Moreover, Moody’s will continue to monitor developments in the European bank debt markets and incorporate in BNPP’s rating (i) any further deterioration; or (ii) an increase in the likelihood of any such deterioration.

RATINGS RATIONALE

In its press release of 14 September 2011, Moody’s concluded that BNPP had a sufficient level of profitability and capital that it could absorb potential losses it was likely to incur on its Greek government bonds (Greece is rated Ca, outlook developing), and to remain capitalised consistent with its BFSR, even if the creditworthiness of Irish and Portuguese government bonds were to deteriorate further. This view incorporated loss assumptions significantly higher than the impairments the bank had recognised up to that point in time.

Since then, BNPP has realised significant impairments on its Greek bond holdings commensurate with our own expectations earlier this year, and has now written down its gross exposures by 60%. It was able to do this while remaining broadly breakeven for the third quarter, adjusting for its gain on own credit spreads, and was thus able to maintain its capitalisation. In addition, Moody’s continues to recognise important credit strengths, notably a very high degree of diversification, a broad spread of businesses with strong market positions, sound capital, efficiency and loan-book quality.

However, Moody’s also noted the challenges to BNPP’s funding and liquidity profiles in light of worsening refinancing conditions, as well as the potential for these conditions to constrain BNPP’s franchise. This resulted in the extension of the review on BNPP’s ratings announced in September 2011.

— Difficult refinancing conditions have reduced BNPP’s liquidity

Since June, BNPP, in common with many other banks, has encountered materially more difficult refinancing conditions, due principally to investor concerns surrounding the European sovereign crisis and the impact on their appetite to invest in banks such as BNPP, given the banks’ direct and indirect exposures to distressed sovereigns and economies. While BNPP has been able to issue some long-term debt (some EUR8 billion between August and October, at an average term of 5.3 years), and has exceeded its refinancing plans for 2011, funding has proven to be more scarce, more expensive and shorter term than anticipated earlier in the year. This is particularly true of US dollar funding, since US money market funds have significantly reduced their exposure to many European banks including BNPP.

This has resulted in a reduction in the availability of funding to BNPP, which has in turn led to a decline in its pool of central bank eligible liquid assets to EUR128bn (post haircut) at end-September from EUR150 billion at end-June. Central bank deposits increased to EUR42 billion from EUR32 billion over the same period. Whilst Moody’s believes that central bank actions will ensure the broad availably of liquidity to the banking sector in general, French banks’ borrowing from the Bank of France materially increased in September; Moody’s understands that BNPP itself is employing the ECB’s longer-term facilities.

This is but one indicator of the tension in funding markets that is credit negative for BNPP. The rating agency believes that central bank eligible liquid assets and central bank deposits broadly cover the group’s short-term wholesale borrowing, net of interbank assets, but not including Moody’s estimates of the current portion of medium and long-term debt. Thus we still consider BNPP vulnerable to a continued lack of investor appetite for bank debt. Given the substantial and sustained disruption to funding markets, it is unlikely that term debt markets will return to any degree of normality in the near future – indeed, the risks are skewed to the downside.

— Resulting deleveraging is challenging and poses risks

The scale of the funding challenge facing BNPP is underscored by the bank’s announcement of a deleveraging plan, aimed at reducing around EUR70 billion of risk-weighted assets (RWA) by the end of 2012. This reduction focuses on US dollar assets, reflecting the particular difficulty in sourcing term US dollar funding. BNPP estimates the one-off impact of this reduction at around EUR1.2 billion in losses on asset sales and restructuring costs. While from a capitalisation perspective this is fully absorbable at about 13 bps of RWAs (after tax), there is an increasing probability, given the system-wide nature of deleveraging efforts under way in France and elsewhere, that a lack of market appetite for assets results in less-than-expected balance-sheet reduction, or at depressed prices. This could mean that the deleveraging plan falls short of its objectives and/or does not succeed in enhancing capitalisation, due to higher-than-foreseen losses.

— Some sovereign and related-country exposures have become riskier

BNPP has taken significant impairment charges on its Greek government bonds, totalling EUR2.6 billion in the third quarter, leaving EUR1.6 billion of net exposure. This exposure, together with those to Ireland and Portugal (EUR0.3 billion and EUR1.4 billion respectively) remain manageable in the context of BNPP’s loss-absorption capacity, due to substantial earnings capacity and capital resources.

However, the bank retains concentrated exposures to other euro area sovereigns including to Italy, which Moody’s downgraded on 4 October 2011 to A2 from Aa2, and also to Belgium (Aa1), which remains on review for possible downgrade. While its Italian exposure was substantially reduced to EUR12.2 billion in the banking book at end-October 2011, given its size, BNPP’s creditworthiness continues to be vulnerable to a further deterioration in Italy’s sovereign credit strength.

Moody’s now factors three notches of systemic support into our long-term debt and deposit ratings of Aa3 (previously two notches). This is derived from the rating agency’s view that the probability of systemic support for BNPP, should the need arise, remains very high. Moody’s believe that France continues to be a high support country, with a strong inclination to support its key financial institutions. The outlook is negative, in line with the outlook on the BFSR.

KEY RATING SENSITIVITIES

Given the negative outlook on the BFSR and long-term ratings, the probability of an upgrade in either is unlikely. The main factors that could lead us to lower our long-term ratings include:

— Any broader reappraisal of the implications of the highly fragile funding environment for banks that are reliant on wholesale funding and vulnerable to a loss of investor confidence;

— A deterioration in sovereign creditworthiness, especially of Italy and Belgium;

— An increase in our expectation of losses resulting from deleveraging;

— An inability to meet capital targets;

— Unexpected losses within the capital markets activity;

— A further material increase in the probability of a recession leading to higher credit losses; and

— A deterioration in the creditworthiness of the support provider, France, or its ability and/or willingness to provide support to the benefit of creditors.

SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES

The ratings on the dated subordinated obligations of BNPP are currently positioned one notch below the senior unsecured ratings. However they are included within the reassessment of subordinated debt announced on 29 November, 2011. This may lead us to withdraw entirely the systemic support of three notches from these securities and notch them from the bank’s standalone credit strength, currently A3. For more details, please see "Moody’s reviews European banks’ subordinated, junior and Tier 3 debt for Downgrade", dated 29 November 2011.

The ratings on the bank’s hybrid obligation are notched off the A3 standalone credit strength. Junior subordinated obligations currently rated one notch below the standalone credit strength remain on review for downgrade in conjunction with the above review. The ratings on other hybrid obligations are not on review and their notching from the standalone credit strength is expected to remain as before.

FORTIS BANK SA/NV AND BGL BNP PARIBAS

Moody’s has also confirmed Fortis Bank SA/NV’s and BGL BNP Paribas’s long-term debt and deposit ratings at A1 and affirmed their Prime-1 short-term ratings. The outlooks on the debt and deposit ratings are now negative, in reflection of the negative outlook assigned to the debt and deposit ratings of parent BNP Paribas. In addition, Fortis Bank SA/NV’s Tier 1 instruments were confirmed at Baa1 (hyb) and assigned a negative outlook. These actions conclude the reviews for possible upgrade initiated on 21 September 2011.

METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007, and Moody’s Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published 17 November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Credit Agricole

Paris, December 09, 2011 — Moody’s Investors Service has today downgraded the standalone bank financial strength rating (BFSR) of Credit Agricole SA (CASA) by one notch to C- from C (mapping to Baa2 on the long-term scale from A3 previously) and the long-term debt and deposit ratings by one notch to Aa3. The one-notch downgrade of the long-term debt and deposit ratings follows the downgrade of the BFSR. The long-term ratings now incorporate three notches of systemic support (previously two notches), derived from the rating agency’s view that the probability of systemic support for CASA remains very high.

The rating actions conclude the review initiated on 15 June 2011 and extended on 14 September 2011. The lower BFSR reflects our view that CASA’s prior credit-positive factors (strong domestic retail banking franchise, good diversification, stable earnings) are now offset by liquidity and funding constraints.

The outlooks on the BFSR and long-term ratings are negative. The Prime-1 short-term rating was affirmed. Dated subordinated debt securities were also downgraded by one notch to A1 and remain on review for downgrade pending our reassessment of systemic support for such debt.

As stated in our recent report "Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns", since the initiation of our review in June 2011, the severity of the crisis facing the euro area has increased. As a large bank in the euro area, the creditworthiness of CASA is necessarily affected by the fragile operating environment for European banks.

Following our review of CASA’s ratings, Moody’s has concluded that:

(1) Liquidity and funding conditions have deteriorated significantly for CASA and Groupe Credit Agricole (GCA), which have made extensive use of wholesale funding markets. The probability that the group will face further funding pressures has risen in line with the worsening European debt crisis.

(2) GCA’s deleveraging plan will likely help somewhat reduce its need for wholesale funding. However, given that many other banks around Europe are engaged in similar programmes, there is a mounting risk that the asset sales, where required, could be detrimental for capital.

(3) GCA retains significant, albeit reduced, exposures to sovereigns and their economies that are themselves experiencing tighter refinancing conditions and declining creditworthiness, notably Greece, which in turn expose the bank to heightened credit and liquidity risks.

These considerations resulted in a lowering of the BFSR by one notch to C-. CASA’s Adjusted baseline credit assessment (BCA), which continues to incorporate full cooperative support and thus the strength of GCA as a whole, has been lowered by two notches to A3 from A1.

We also believe that:

– The likelihood that GCA would benefit from government support (if needed) remains very high; this leads to a one-notch downgrade in the senior debt and deposit ratings, despite the two-notch reduction in CASA’s Adjusted BCA; and,

– Conditions in the euro-area sovereign debt and banking markets — as well as macroeconomic conditions overall — lead us to assign a negative outlook to CASA’s standalone and long-term debt and deposit ratings.

Moreover, Moody’s will continue to monitor developments in the European bank debt markets and incorporate in GCA’s and CASA ratings (i) any further deterioration; or (ii) an increase in the likelihood of such deterioration.

RATINGS RATIONALE

In its press release of 14 September 2011, Moody’s concluded that although GCA had considerable resources to absorb potential losses it was likely to incur on its Greek government bonds (Greece is rated Ca, outlook developing) and its Greek subsidiary Emporiki Bank of Greece (B3/NP/E outlook negative), the exposures themselves were too large to be consistent with the existing ratings. As a result, CASA’s BFSR was downgraded to C from C+ and its adjusted BCA, which takes into account cooperative support and thus the overall strength of GCA, was lowered to A1 from Aa3.

Since then, GCA has realised significant impairments on its Greek bond holdings, commensurate with Moody’s own expectations earlier this year, and has now written-down 60% of its gross exposures, of which a material part are held by its insurance subsidiaries. GCA was able to do this while remaining profitable in the third quarter. In addition, Moody’s continues to recognise important credit strengths, notably CGA’s leading position in the domestic retail banking market, good diversification, stable earnings, sound capital, solid efficiency and strong overall loan book quality.

However, Moody’s also noted the challenges to GCA’s funding and liquidity profiles in light of worsening refinancing conditions, as well as the potential for these conditions to constrain GCA’s franchise. This resulted in the extension of the review on CASA’s ratings announced in September 2011.

— Difficult refinancing conditions have reduced GCA’s liquidity

Since June, GCA, in common with many other banking groups, has encountered materially more difficult refinancing conditions, due principally to investor concerns surrounding the European sovereign crisis and the consequent reduction in their appetite to invest in banks such as GCA, given its direct and indirect exposure to distressed sovereigns and countries. CASA has been able to issue some long-term debt (EUR6.6 billion between June and October), and has exceeded its refinancing plans for 2011. However, funding has proven to be more scarce, more expensive and shorter term than anticipated earlier in the year. This is particularly true of US dollar funding, since money market funds have significantly reduced their exposure to many European banking groups including GCA.

This has resulted in a reduction in the availability of funding to GCA, which has in turn contributed to a reduction in its pool of highly liquid reserves to EUR103 billion (post haircut) at end-September from EUR123 billion at end-July, although we understand it has since increased. We expect that central bank actions will ensure the availability of liquidity to the banking sector, and indeed we note that French banks’ borrowing from the Bank of France materially increased in September. This is one indicator of the tension in funding markets, which is credit negative for GCA. Structurally, Moody’s believes that liquid assets cover only a portion of short-term wholesale borrowing, even net of interbank assets, which renders GCA vulnerable to a continued lack of investor appetite for bank debt. Given the high and sustained disruption to funding markets, it is unlikely that term debt markets will return to any degree of normality in the near future; overall, Moody’s believes that the risks are skewed to the downside.

— Resulting deleveraging is challenging and poses risks

GCA has announced a deleveraging plan in response to these challenges, which it expects will reduce its wholesale funding requirement by EUR50 billion through asset reductions by the end of 2012. However, given that many banks in France and elsewhere are now engaged in deleveraging efforts, Moody’s believes that there is a risk that, where asset sales are required, a lack of market appetite could lead to a shortfall against the targeted reduction, or it may be possible only at depressed prices. This could mean that the deleveraging plan might either fall short of its objectives and/or turn net-negative for capitalisation — rather than positive — should losses exceed expectations.

— Some sovereign and related country exposures have become riskier

GCA has taken large impairment charges on its Greek government bonds, totalling EUR1.1 billion in the second and third quarters, leaving EUR0.2 billion of net exposure on its own bank balance sheet and EUR2.7 billion in its insurance subsidiaries. In the context of GCA’s loss-absorption capacity, these exposures, together with those to Ireland and Portugal — EUR0.2 billion and EUR0.7 billion for GCA and EUR1.5 billion and EUR2.2 billion for the insurance subsidiaries — remain significant but manageable.

However, during the review Moody’s concluded that the probability of multiple defaults (in addition to Greece’s private-sector involvement programme) by euro-area countries is no longer negligible. In Moody’s view, the longer the liquidity crisis continues, the higher the likelihood of sovereign or bank defaults, and ultimately the potential exit of one or more countries from the euro area. In particular, GCA retains a Greek banking subsidiary, Emporiki Bank of Greece, which had a gross loan book of around EUR24 billion and an NPL ratio of 31% at end-September 2011, with a cost of risk for 2011 year-to-date of about 520 basis points of loans, indicating the severity of credit issues in its lending. In addition, GCA provides significant cross-border funding to Emporiki (EUR7.8 billion at 30 September 2011), which would likely be subject to impairment in a scenario of a Greek exit from the euro area. Moreover, GCA retains a large exposure to Italy, which Moody’s downgraded on 4 October to A2 from Aa2. Banking and trading-book holdings fell to EUR6.7 billion in the third quarter, but given the size of this exposure, GCA’s creditworthiness is sensitive to a further deterioration in Italy’s sovereign credit strength.

Moody’s regards France as a high support country and GCA plays a major role as intermediary in the French economy and is integral to the banking system. Moody’s assess the probability of systemic support for CASA in the event of distress as being very high. As such, the bank receives a two-notch uplift from its Adjusted BCA, which brings the global local-currency deposit rating to Aa3. The outlook is negative, in line with the outlook on the BFSR.

KEY RATING SENSITIVITIES

Given the negative outlook on the BFSR and long-term ratings, the probability of an upgrade in either is unlikely. The main factors that could lead to a downgrade of the long-term ratings include:

— Any broader reappraisal of the implications of the highly fragile funding environment for banks that rely on wholesale funding and are vulnerable to a loss of investor confidence;

— An increase in our expectation of losses resulting from deleveraging;

— An inability to meet capital targets;

— Unexpected losses within the bank’s capital markets activity;

— A further material increase in the probability of a recession leading to higher credit losses; and

— A deterioration in the creditworthiness of the support provider, France, or its ability and/or willingness to provide support to the benefit of creditors.

SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES

The ratings on the dated subordinated obligations of CASA are currently positioned one notch below the senior unsecured ratings. However, they are included within the reassessment of subordinated debt announced on 29 November 2011. This may lead us to withdraw entirely the systemic support of three notches from these securities and notch them from the bank’s adjusted BCA, currently A3. For more details, please see our note "Moody’s reviews European banks’ subordinated, junior and Tier 3 debt for Downgrade", dated 29 November 2011.

The ratings on the bank’s hybrid obligation are notched off the Adjusted BCA of A3. Junior subordinated obligations currently rated at one notch below the Adjusted BCA remain on review for downgrade in conjunction with the above review. The ratings on other hybrid obligations are not on review and their notching from the Adjusted BCA is expected to remain as before.

CREDIT AGRICOLE CORPORATE AND INVESTMENT BANKING (CACIB)

The Aa3 long-term debt and deposit ratings were confirmed at Aa3 with negative outlook, in line with those of CASA. Moody’s now assumes full cooperative support to CACIB from GCA, further to the publication of the decree by the French government confirming the modification of banking law, allowing completion of the affiliation process initiated by CASA in September. Moody’s notes that CACIB will become formally affiliated to CASA after approval by the CASA Board of Directors, which we expect to take place in mid-December. At this point, CASA will, under French law, assume a legal responsibility for the solvency and liquidity of CACIB. In the unlikely event that affiliation does not take place as expected, CACIB’s ratings may be lowered.

LE CREDIT LYONNAIS SA (LCL)

Moody’s has also downgraded LCL’s long-term debt and deposit ratings by one notch to Aa3 from Aa2 and affirmed its Prime-1 short-term rating. The subordinated debt ratings were also downgraded by one notch to A1 from Aa3 and remain on review for possible downgrade. The outlook on the debt and deposit ratings is now negative, in reflection of the negative outlook assigned to the debt and deposit ratings of parent CASA. LCL’s BFSR of C+, mapping to a BCA of A2, is unaffected by the current rating actions and its outlook remains stable. LCL’s adjusted BCA, including parental support, is changed to A2 from A1, reflecting CASA’s lower adjusted BCA of A3. As a result, its junior subordinated MTN program has been downgraded by one notch to (P)A3 from (P)A2 and remains on review for possible downgrade.

METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007, and Moody’s Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published 17 November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Société Générale

NOTE: On December 9th, 2011, Due to an administrative error the incorrect press release was issued.Revised release follows:

Paris, December 09, 2011 — Moody’s Investors Service has today downgraded the standalone bank financial strength rating (BFSR) of Société Générale (SocGen) by two notches to C- from C+ (mapping to Baa1 on the long-term scale from A2 previously) and the long-term debt and deposit ratings by one notch to A1. The one-notch downgrade of the long-term debt and deposit ratings follows the downgrade of the BFSR. The long-term ratings now incorporate three notches of systemic support (previously two notches), derived from the rating agency’s view that the probability of systemic support for SocGen remains very high.

The rating actions conclude the review initiated on 15 June 2011 and extended on 14 September 2011. The lower BFSR reflects our view that SocGen’s prior credit-positive factors (notably high diversification, strong franchises, stable earnings) have diminished and are now offset by liquidity and funding constraints. The outlooks on the BFSR and long-term rating are negative. The Prime-1 short-term rating was affirmed. Dated subordinated debt securities were also downgraded by one notch to A2 and remain on review for downgrade pending our reassessment of systemic support for such debt.

As stated in our recent report "Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns", since the initiation of our review in June 2011, the severity of the crisis facing the euro area has increased. As one of the largest banks in the euro area, SocGen’s creditworthiness is necessarily affected by the fragile operating environment for European banks.

During our review of SocGen’s ratings, Moody’s has concluded that:

(1) Liquidity and funding conditions have deteriorated significantly for SocGen, which has made extensive use of wholesale funding markets. While liquid assets have declined only modestly, the probability that the bank will face further funding pressures has risen in line with the worsening European debt crisis.

(2) SocGen’s deleveraging plan will likely help somewhat reduce its need for wholesale funding. Although the bank has already carried out part of its plan with limited losses, given that many other banks in Europe are engaged in similar programmes, there is a mounting risk that any further asset sales, where required, could generate less-than-expected or negative capital.

(3) SocGen retains some modest exposures to sovereigns and their economies that are themselves experiencing tighter refinancing conditions and declining creditworthiness. Greek and Italian exposures have declined, but still expose the bank to some credit and liquidity risks.

These considerations have led to a downgrade of SocGen’s BFSR by two notches to C-. Moreover, Moody’s believes that:

The likelihood that SocGen would benefit from government support (if needed) remains very high; this leads to a one-notch reduction in the senior debt and deposit ratings, despite the two-notch downgrade in standalone financial strength; and conditions in the euro area sovereign debt and banking markets — as well as macroeconomic conditions overall — lead us to assign a negative outlook to SocGen’s standalone and long-term debt and deposit ratings.

Moreover, Moody’s will continue to monitor developments in the European bank debt markets and incorporate in SocGen’s ratings any (i) further deterioration; or (ii) an increase in the likelihood of such deterioration.

RATINGS RATIONALE

In its press release of 14 September, 2011, Moody’s concluded that SocGen had a sufficient level of profitability and capital that it could absorb potential losses it was likely to incur on its exposures to the Greek government and economy (Greece is rated Ca, outlook developing), and to remain capitalised consistent with its BFSR, even if the creditworthiness of Irish and Portuguese government bonds were to deteriorate further. This view incorporated loss assumptions significantly higher than the impairments the bank had recognised up to that point in time.

In the third quarter, SocGen made further impairments on its Greek bond holdings and has now taken losses commensurate with Moody’s own expectations earlier this year, having written-down 60% of its gross exposures. SocGen was, however, broadly able to breakeven for the third quarter, adjusting for its gain on its own credit spreads; it thus maintained its existing capital ratios and indeed further improved capitalisation following a recent liability management exercise. SocGen does not intend to pay a dividend for 2011, which should further enable capital retention. Moody’s continues to recognise important credit strengths for SocGen, notably a high degree of diversification, a broad spread of businesses with good market positions, as well as sound overall loan-book quality.

However, Moody’s also noted the challenges to SocGen’s funding and liquidity profiles in light of worsening refinancing conditions, as well as the potential for these conditions to constrain SocGen’s franchise. This resulted in the extension of the review on SocGen’s BFSR announced in September 2011.

— Difficult refinancing conditions have reduced SocGen’s liquidity

Since June, refinancing conditions have worsened considerably, mainly due to investor concerns surrounding the European sovereign crisis and the impact on their appetite to invest in banks such as SocGen, given the bank’s direct and indirect exposures to distressed sovereigns and economies. Although SocGen has been able to issue some long-term debt (EUR4.1bn in the third quarter, at an average term of 5.6 years), and has exceeded its refinancing plans for 2011, funding has proven to be more scarce, more expensive and shorter term than anticipated earlier in the year. This is particularly true of US dollar funding, since US money market funds have significantly reduced their exposure to many European banks, including SocGen, even while short-term euro-denominated funding has remained available.

The resultant reduction in the availability of funding to SocGen has in turn led to a slight decline from end-June in its pool of central bank eligible liquid assets to EUR77 billion (post haircut) at end-September. Moody’s believes that central banks will continue to make liquidity available to the banking sector, and note that French banks’ borrowing from the Bank of France materially increased in September. This is one indicator of the stress in wholesale funding markets that is credit negative for SocGen. While Moody’s believes that unencumbered central-bank-eligible assets of EUR77 billion broadly cover the bank’s outstanding short-term wholesale borrowing, net of interbank assets and central bank deposits, SocGen is nonetheless vulnerable to a continued lack of investor appetite for bank debt. Given the substantial and sustained disruption to funding markets, it is unlikely that term debt markets will return to any degree of normality in the near future – indeed, the risks are skewed to the downside.

— Resulting deleveraging is challenging and poses risks

SocGen has announced a plan to respond to market conditions by reducing its liquidity needs by EUR75-95 billion by 2013, and its risk-weighted assets by EUR60-80 billion. This reduction focuses on US dollar assets, as funding pressures have been greatest in this currency. SocGen has not publicly estimated the one-off cost of this reduction, but estimates a benefit to its pro forma Basel 3 core Tier 1 capital ratio of around 100 bps by 2013. The bank has reported a reduction of around EUR40 billion in the liquidity needs of its corporate and investment bank in 3Q11. However, in Moody’s view, given the broader deleveraging efforts being undertaken by banks in France and elsewhere, there is an increasing risk that a lack of market appetite for assets might result in a less-than-expected balance-sheet reduction, or sales at depressed prices. This could mean that the deleveraging plan ultimately falls short of its objectives and/or does not succeed in improving capitalisation due to higher-than-anticipated losses.

— Some sovereign and related-country exposures have become riskier

SocGen has taken material impairment charges on its Greek bonds, totalling EUR333 million in the third quarter, leaving EUR0.8 billion of total net exposure. This exposure, together with those to Ireland and Portugal (EUR0.4 billion and EUR0.5 billion, respectively) remain manageable in the context of SocGen’s earnings and capital resources.

Nonetheless we believe that the probability of multiple defaults (in addition to Greece’s private-sector involvement programme) by euro-area countries is no longer negligible, and this probability will continue to rise, in Moody’s view, the longer the liquidity crisis continues. A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area. In particular, SocGen retains a Greek banking subsidiary, General Bank of Greece SA (B3/NP/E), to which it provides some cross-border funding (we understand under EUR1 billion), which would likely be subject to impairment in such a scenario.

Moody’s now factors three notches of systemic support into the A1 long-term debt and deposit ratings (previously two notches). This is derived from Moody’s view that the probability of systemic support for SocGen, should the need arise, remains very high. The rating agency believes that France continues to be a high support country, with a strong inclination to support its key financial institutions. The outlook is negative, in line with the outlook on the BFSR.

KEY RATING SENSITIVITIES

Given the negative outlook on the BFSR and long-term ratings, the probability of an upgrade in either is unlikely. The main factors that could lead Moody’s to downgrade its long-term ratings include:

— Any broader reappraisal of the implications of the highly fragile funding environment for banks that rely wholesale funding and are vulnerable to a loss of investor confidence;

— A deterioration in sovereign creditworthiness;

— An increase in Moody’s expectation of losses resulting from deleveraging

— An inability to meet capital targets;

— Unexpected losses within the bank’s capital markets activity;

— A further material increase in the probability of a recession leading to higher credit losses; and

— A deterioration in the creditworthiness of the support provider, France, or its ability and/or willingness to provide support to the benefit of creditors.

SUBORDINATED OBLIGATIONS AND HYBRID SECURITIES

The ratings on the dated subordinated obligations of SocGen are currently positioned one notch below the senior unsecured ratings. However, they are included within the reassessment of subordinated debt announced on 29 November 2011. This may lead us to withdraw entirely the systemic support of three notches from these securities and notch them from the bank’s BCA, currently Baa1. For more details, please see our note "Moody’s reviews European banks’ subordinated, junior and Tier 3 debt for Downgrade", dated 29 November 2011.

The ratings on the bank’s hybrid obligation are notched off the BCA of Baa1. Junior subordinated obligations currently rated one notch below the BCA remain on review for downgrade in conjunction with the above review. The ratings on other hybrid obligations are not on review and their notching from the BCA is expected to remain as before.

METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007, and Moody’s Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published 17 November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

1 Comment

These banks all need significant levels of re-capitalisation. Everyone knows it is a consequence of their reckless expansion overseas. The problem is that governments have been very remiss to regulate the external exposure of their banks, citing that they bring in extra profits that benefit the state one way or another. The exposure to the periphery will cost them hundreds of billions and that has to be found somewhere. Longer term state banks need capital controls to stop them expanding beyond the ability of the state to back stop them. That still has not been discussed so expect future problems.

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